Goal-based investing: Why it pays to look at the big picture

Planning your finances around specific life goals, like buying a house, could pay dividends
There’s no golden rule, but don’t be afraid to take risks.
The casual observer might think that the only way to invest is to seek the highest possible return on a single pot of money, chasing the latest themes in markets and following certain star fund managers. But the experts say that goal-based investing – structuring your investment portfolio around certain specific life goals, like saving for a house deposit or a child’s wedding – is increasing in popularity, and can be highly effective. A survey by online investment manager Nutmeg found that two-thirds of people saving for a specific goal last year reached their target.


Maike Currie, associate investment director at Fidelity Personal Investment, says that investing with specific goals in mind means “looking at the intricacies of investment, taxation and pensions.” Someone saving for a house deposit over a 10-year period, for example, will require radically different products and investment vehicles to an investor building up a lump sum for retirement.
There is, she says, “no golden compass” for how best to invest – after all, goal-based investing may mean having several pots of money at the same time. And because people’s aims differ, goal-based plans will likely be highly personalised. For example, a retired couple looking to take a short break, guarantee a constant retirement income and save for another holiday in the future may need three pots. First, a capital preservation pot for their break; second, a retirement one which focuses on capital stability and a steady stream of returns; finally, a riskier long-term pot to help them save for further travel.
But whatever your goals are, having a specific target in mind is likely to help focus your investment decisions and provide added discipline. As psychologist Donna Dawson comments, “the best way to reach a goal is to narrow your focus and make it specific.” Setting up a savings structure (committing to set aside a certain amount each month, for example) should increase your chances of reaching the goal.


And being clear about the goals you’re saving towards will allow you to more closely tailor your risk profiles to different investment ends. If, for instance, you have £15,000, and are working towards having £25,000 to put down as a deposit on a house in eight years’ time, the rate of return you will need is 6.5 per cent per annum, according to Danny Cox, head of financial planning at Hargreaves Lansdown.
He points out that investing in cash would mean you’d come up short – the best five-year interest rates currently being roughly 3.5 per cent. Investing in the stock market – although meaning your level of return is not guaranteed – will make it more achievable.
One option is to use target-dated funds, says Cox, which work to manage investments to a specific date and capital sum. These specialist funds can also take into account the need to reduce portfolio risks as you get nearer to your financial goal, making it less likely that you’ll suddenly lose a large amount of capital just before you need the money. Despite being relatively popular in the US, target-dated funds are yet to properly take off here in the UK. But with people looking for cheaper and simpler investment solutions, Cox says, this could change.
Over short time horizons, (saving for a wedding in the next few years, for example) the volatility of equities and other risk assets is likely to be a cause for concern, says Plutus Wealth’s Thomas Diaper. In this case, more conservative asset classes such as cash accounts and safe government bonds could be the best options.
But long-term investors, Diaper says, actually tend to underestimate the levels of risk that may be necessary to meet far-off goals, like saving for retirement. “A cautious investor in their 30s might be surprised to find out how high on the risk scale their company’s pension funds are invested.”


When it comes to how to save for your investment goals, it’s vital to bear in mind tax efficiency, says Currie. The new Isa (Nisa) and Sipp pension products are two of the most popular tax-efficient ways to save.
But while many Nisas are relatively flexible with allowing access to capital (provided that you’re prepared to forego the future tax-sheltered status of the money you withdraw), Sipps come with more restrictions. Most only allow you to access capital after the age of 55. For someone saving towards their first deposit on a house, this obviously isn’t ideal.

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